The progressive case for the excise tax

Art Levine has a good post on the AFL-CIO's opposition to taxing insurance benefits. He links to an ad they've released (pdf) that says, in bold letters, "IT IS JUST WRONG TO PUT THE BURDEN OF PAYING FOR HEALTH-CARE REFORM ON MIDDLE-CLASS FAMILIES."

Begin at the beginning: The burden of paying for health-care reform will not fall on middle-class families. The Senate Finance bill costs a shade under $900 billion over the first 10 years. The excise tax on high-value health-care insurance plans, which is the piece that concerns the AFL-CIO, will raise $201 billion over that time period, or 22 percent of the total cost. That tax, insofar as it is paid at all, will be paid by workers with employer-provided health-care plans that cost about $8,000 more than the national average. These are plans, in fact, that cost more than what the average member of Congress purchases. Most of the workers receiving these benefits are not helming middle-class families.

What we're talking about, in other words, is a limited surtax that pays for a small slice of health-care reform and mainly falls on high-income workers. It is not "putting the burden of paying for health-care reform on middle-class families."

The AFL-CIO, however, is undoubtedly right that relatively more middle-class families will be affected by this surtax than by a tax on income over $500,000 a year. If that was the comparison, than I too would support an income tax rather than an excise tax. But it's not. The excise tax, I'd argue, is actually more progressive than the income tax.

The reason is that, unlike the House's surtax on family income over $1,000,000, the excise tax on high-cost insurance plans is not simply a tax. It's also a policy. Economists believe, with substantial evidence, that it will restrain the growth in health-care costs by making employers less willing to pay the automatic increases that insurers pass down each year. That money, they believe, will be routed back into wages. This is not intuitive, but it is, again, heavily backed up by evidence.

Few forces in American life are as regressive as the rise in health-care costs. At the bottom of the income scale, the rising costs make it impossible for employers to offer insurance coverage and convince some employers to end their health benefit programs, throwing their workers into the ranks of the uninsured. Moving up, working-class folks see their wages stagnate and their premium payments increase.

This might all be fine if there was real evidence that expensive insurance products did a much better job of keeping people healthy than more affordable insurance products. But there's no evidence for that contention at all. Indeed, many experts are beginning to believe the opposite: Overly permissive insurance mixed with a system where doctors and hospitals make more money for prescribing more procedures mixed with a culture in which individuals think more medical treatment will do them good has led to overtreatment that probably does people a bit of harm and definitely hurts their paychecks.

There's a lot of good in this iteration of health-care reform, but there's not enough cost control. The delivery system reforms show some promise, as do initiatives such as comparative effectiveness review and health information technology. But those are a lot more speculative than a simple, blunt tax that makes employers think twice about signing off each year on huge increases in insurance premiums that come quietly out of worker's wages. The excise tax isn't as progressive as a tax on high incomes, but the excise tax as a policy is more progressive, because it attacks one of the most regressive economic forces in American life: the relentless rise in health-care costs and resulting stagnation in wages.

2 other points on the excise tax: (1) Since some of the financing of HCR comes from Medicare cuts, with a likely realization of less than 100%, a funding source that grows as quickly as health care costs (and makes more money in the second decade than the first) can cover the expected budget shortfall from lack of Medicare cost savings.

(2) The milquetoast public option in the bills won't control costs, but HMOs do control costs. Given that we aren't going get a decent public option, getting people to choose more managed care can take the place of the lack of a strong public option in long term cost controls.

"Indeed, many experts are beginning to believe the opposite: Overly permissive insurance mixed with a system..."

I notice that you don't claim that there is any evidence for that belief either; you just reference a group of "experts" who are okay with raising insurance premiums on one group to subsidize more insurance for another in the hope that some magical force will address the costs of care.

Insurance companies were designed by providers to generate a dependable revenue stream for those entities, not control their costs. Insurance companies do not not dictate the cost of care. They don't set hospital costs and they do not control the cost of drugs. They were never meant to do that and are structurally unable to do what you expect.

Your implication that there is any health care reform in any of these bills is misguided. It is yet another financial services bill that moves things around in the insurance industry -- it has zero to do with improving access to care for everyone in a sustainable way.

As we read a couple of days ago, Congress has a terrible record of actually implementing innovations that would reduce Medicare costs. There is no reason to believe that any of the tentative experiments the bills under consideration would see the light of day.

I'd just go back to the example I gave two weeks ago with the waitress with the 10-year-old diabetic child subsidizing my health insurance for my 10-year-old diabetic child. Surely we can find a more equitable way to spend the $3.5 trillion tax subsidy for employer-provided health insurance such that the waitress isn't subsidizing me.

Here's the math (and I'm an actuary). Let's say your marginal tax rate from income taxes, employer and employee payroll taxes, and state income taxes is 45 percent. That means that Uncle Sam, by making employer-provided health benefits not treated as taxable income, subsidizes 45 percent of your health care premiums. [Meanwhile, that waitress over at the local diner gets help from Uncle Sam because she's not lucky enough to get health insurance through her employer.] So let's say your plan costs $20,000, and we set the cap at $16,000. That means if you switch to a $16,000 plan or less (i.e., a plan with a much tighter network and/or a small deductible rather than no deductible), Uncle Sam will continue to subsidize 45 percent of your health insurance premiums. If you want to keep your current $20,000 plan, then Uncle Sam will only subsidize 0.45 * ($16,000/$20,000), or 36 percent, of the premiums.

Is this a sacrifice? Sure. But it's a sacrifice I'm willing to make so the waitress with the diabetic child who gets zero help from Uncle Sam actually gets some relief.

Ezra misuses the term "average". The average cost of a healthcare policy can not include massive risk pools like federal and state employee plans (read FHEBP) An average employer has maybe 20 employees. These people can't get the rates of the massive pools.

1) You have to extract the huge risk pools from the total number of insured to get a more realistic threshold.

2) Tons of other factors contribute to cost including sex, age, occupation pre-existing condition to name a few. Also, members of Congress work in low-risk environments unlike a cop, firefighter, welder, flight attendant or construction worker.

Perhaps Ezra can take some time away from his undying love for the excise tax and have some fun by researching how much it would cost to insure the 100 US Senators by themselves using the BC/BS standard option. You have most of the data you would need for this.

Hey cubbyfan, maybe you didn't realize it but there is a HCR bill that will CREATE NATIONAL EXCHANGES that everyone in the small business and individual market will purchase from, therby creating a MUCH larger pool than the FEHB.

Um, Ezra, the JCT estimates that the tax in the Baucus bill will affect 1/3rd of plans in 10 years. That's not Cadillacs, that's Chevys. Huge numbers of people will be affected. Anyone who falls under the tax will see the cost of their plans increase. That's the opposite of the point of health care reform, which seeks to lower costs, not raise them. Obama opposed this in the campaign because he knew it was a middle class tax increase.

Your graph is also unpersuasive. If I understand it right, it says that lower health care cost increases lead to higher wage increases. That's no surprise. But the excise tax is a health care cost increase, not a reduction in health care costs. That does not lead to higher wages - it leads to lower wages.

Put more simply, employers in a near-depression are going to cut benefits to get under the excise tax... but they won't pass along any difference as a wage increase. They'll just cut enough to get under the cap, leaving people with lousier coverage.

Dear reader, think what's happened to your coverage: as costs have risen, your coverage has not gotten better, it's gotten worse. And your employer hasn't given you a raise as compensation. Reality to Ezra: come back to us.

Having the top 1/3 get included in the excise tax is sort of the idea. It causes folks to continue choosing more managed care plans, which reduce cost growth better. Plus, when you combine the minimum coverage requirements of HCR with the price pressure from the excise tax, it causes insurance companies to put pressure on providers to lower costs, too. The cap will have to be adjusted eventually because it will eventually include every plan. But between now and then, there is a benefit to be had.

The JCT estimate, just to be clear, says those folks won't pay that money. Instead, they'll choose more managed plans and get higher wages. So no, they won't be paying the tax. And if the policy works, and it does restrict the rate of growth, fewer plans will get tapped.

You can't really get away from the fact that health-care insurance, first, tilts high income (the uninsured are disproportionately poor), and then generous benefits cluster among high-income folks (the Target company health plan, I promise, doesn't get hit by this tax). I don't deny that some plans from a small minority of actually middle-income folks will bump up against this tax, but it is quite a small number in the aggregate.

"Having the top 1/3 get included in the excise tax is sort of the idea. It causes folks to continue choosing more managed care plans, which reduce cost growth better."

People in Washington have no idea how the rest of the country lives.

A friend of mine in Atlanta is shopping for individual coverage right now and was considering Kaiser there. For a woman of her age, there are 5 possible plans that exceed the $8000/yr limit. It turns out that if she were to move to Denver, all of the offered plans would be well under the "Cadillac" threshold.

I don't know what is so special about the Atlanta market that one of the premier cost-cutting delivery systems would feel obligated to offer those plans but I don't think there is anything in the proposals that would help those people.

Taxing insurance premiums won't change how much providers in individual markets charge. The proposed excise tax is just another shell game to make well meaning types think that they are doing something for "the poor" without hurting themselves.

That means 'Athena_news' you want streamlined, nationwide uniform (adjusted to cost of living of course) price structure. And your follow up contention is that is what comes via universal health care provided by Government. Am I following here?

What if you get that nationwide uniform structure but multiple ways of funding insurances based on those prices? That with exchanges could still work.

So to me your key seems to be 'uniform, structured pricing' where the real power of arbitrary decision of providers is taken away.

Public Utilities Commission at State level - do they operate like that? Practically States decide what margin electricity providers can have.

Of course, electricity with few variations (say season, transmission and mechanism to produce it) is easier to control in prices than myriad types of medical services and products.

I've said it before and I'll say it again:
if unions feel that their members will be over taxed they should look to change the income tax structure; they should not stand in the way of good policy like this excise tax.

Elimination of tax benefits for group insurance is the path to reforming this "system."

"you want streamlined, nationwide uniform (adjusted to cost of living of course) price structure. And your follow up contention is that is what comes via universal health care provided by Government. Am I following here?"

Not quite. *Universality* is a pre-requisite to controlling costs. Most universal care systems do not depend on government to provide care; they depend on government to set a framework that applies to everyone. It doesn't matter whether the chosen system is "government run" single-payer, privately run all-payer, or individual-payer, the point is that *everyone* is in the same financing model.

Standard charge schedules aren't some sort of silver bullet that can convert a dysfunctional model into something sustainable. They are an organic outgrowth of universal coverage.

The proposed exchanges are in fact, the antithesis of universality in that they would create yet another block in any already confusing patchwork. There is nothing universal about mandated private insurance for anyone who is unfortunate enough to not have his coverage financed by someone else. As long as there are different financing models for different standard charges are nothing but another interesting talking point.

"if unions feel that their members will be over taxed they should look to change the income tax structure; they should not stand in the way of good policy like this excise tax.

Taxing one group's insurance to subsidize private insurance for another group is not "good policy".

The fact that legislators don't have enough spine to abolish the tax exclusion for employer paid benefits and establish an individual exclusion (not deduction but exclusion) doesn't mean that this convoluted alternative is good policy.

StokeyWan and Ezra -
Thanks for the replies. But I think you are missing the points:
1. A third of plans affected by the tax means the impact reaches deep into the middle class.
2. What you imagine as an easy shift by employers to managed care and other plans is often a cut in health care benefits. More benefits = higher cost of plan. People would get worse health care coverage as employers changed plans to get under the cap.
3. There's no magic that will get companies to suddenly find cheaper plans that fall under the cap *and* deliver the same benefits. They'll just cut benefits.
4. When employers cut health care coverage because of higher costs, they don't give people a wage bump. Show me one person who has had a wage increase when their employer cut their health care coverage or made them pay more for their plans - I don't know anyone like that. The tax will raise costs and cut care and people won't get a salary bump. The higher salaries that JCT envisions is a mirage and your chart does not provide evidence.
5. The politics of hitting lots of middle class workers with this tax are absolutely awful - a direct contradiction of Obama's promise. The mid-terms will be very ugly for Democrats if they go back on their promises not to tax the middle class.
You can minimize these points all you want, but the bottom line is that you don't have evidence for your claims beyond the (unproven but seductive) wonk idea that if you raise employer costs, they will get more efficient.
But that hasn't happened in the US health care system - years of medical cost inflation haven't made the system more efficient... if only it had.
The House gets this right. Taxing the rich and forcing employers who do not pay for health care to provide it is the right way to finance the plan. Taxing middle class benefits is bad policy and terrible politics.